Today's Stone Cold Steel Pipe Lock CAPS Short
To borrow a phrase from ESPN's Mike & Mike in the Morning, I now bring you today's Stone Cold Steel Pipe Lock CAPS short. I have not come this close to attempting to short a stock with real money since I was unable to borrow shares of Moody's (MCO) around a year ago. The stock that I am so negative on is Tesla Motors (TSLA).
For those of you who aren't familiar with the company, and if you're not it likely means that you've been vacationing in a tropical island or searching for terrorists in Afghanistan without any access to television or the Internet, Tesla produces luxury plug-in electric vehicles. It is scheduled to launch its IPO today at $17/share.
As someone who has worked in the auto industry for well over a decade, I have developed a sort of sixth sense that enables me to tell with fairly good accuracy which new models / companies will be successful and which ones will fail. Ironically, I am actually rooting for plug-in electric vehicles to catch on so it pains me to say that I believe Tesla will likely die a long, slow death.
Let's look at the facts.
- Tesla was created by Elon Musk the founder of Pay Pal, not some automotive guru, the freaking founder of Pay Pal. That's like buying into a car company founded by the always annoying Mark Cuban. Not only does Musk have no experience in the auto industry, he's practically bankrupt. You can say all you want that a person's private life shouldn't matter, but when the CEO of a company is going through a nasty divorce, it stands to reason that they might be a little distracted. Musk plans to sell $20 million worth of Tesla stock in today's IPO.
- The company has never made a profit. It lost 29.5 million dollars last quarter and 55.7 million dollars in 2009.
- The only reason that Tesla is still alive and kicking after the meltdown in the auto industry is the government in its infinite wisdom decided to provide it with $465 million worth of our tax dollars at a time when the country is running a massive deficit.
- Tesla currently only has one model, a $100,000 roadster. The roadster market is limited enough, let along the market for a one hundred thousand dollar plug-in vehicle with a limited range.
- Tesla is trying to develop a $50,000 plug-in electric sedan that might be available some time in 2012 (I'll believe that when I see it). Meanwhile, real automakers are furiously working on developing plug-in vehicles that will likely be available some time later this year (Nissan Leaf / Chevrolet Volt)
- Small independent automakers don't work. There's a long list of small companies in the auto industry that were at one time successful, but were unable to go it alone in the U.S. market...Saab, Hummer, Volvo, Jaguar, Land Rover, Daewoo, etc... Eventually every one of these companies was forced to sell out to a major automaker or stop selling vehicles in the U.S. Heck even Chrysler was a dead man walking until Fiat bailed them out. There is only one company that I consider to be successful that sold as few as 20,000 units in 2009...Porsche. Porsche isn't even independent any longer. It was eventually bought out in a fascinating battle with Volkswagen. And it would be an absolute miracle if Tesla sold even that many vehicles. Small, independent automakers don't have the cost structure to compete in the uber-competitive U.S. market.
- Tesla doesn't have an extensive network of dealerships. There are currently only 12 Tesla dealers. Most people who purchase luxury vehicles want to know that they'll have some place to service them. They aren't going to want to go out of their way to drive all over the place to have their vehicle worked on or question whether the dealership that they bought their car from will even be there a year or two from now. How ironic would it be if the place that you needed to drive to to have your Tesla serviced at was further away from your home than the car's driving range. As idiotic as it sounds, with only 12 dealers, it's very possible.
There are a few things that give me pause about shorting Tesla. First and foremost as we learned in the dot com bubble, the market can remain irrational for long periods of time. It is very possible, perhaps even likely that the share price of Tesla will rise well above its initial $17/share offering price. The offering priced above its initial target of $14 - $16/share and it was oversubscribed. I'm sure that a bunch of slimy hedge funds out there with connections are chomping at the bit to flip this thing in order to make a quick profit.
The current Tesla roadster is cool looking, fast as he-two-sticks, and gets an impressive 200+ miles per charge. Those are attractive attributes, but it's one thing to build a handful of expensive, cool cars and completely another to do so in an industry (autos) that's almost as bad as the airline industry.
Toyota invested $50 million in Tesla. That money is peanuts to a huge automaker like Toyota, but still is shows that there's at least some interest there.
Tesla is also partnering with Daimler (Mercedes-Benz's parent company) to develop an electric version of its Smart car. It remains to be seen how successful that venture will be though. Smart's sales have completely fallen off of a cliff and increased competition in the A- and B-Car segment is coming on fast.
Tesla is in the process of purchasing the recently closed NUMMI factory in Fremont, California. It's difficult to say how much of this was because of the people who worked there and the way that it was run rather than the plant itself, but NUMMI has always been well-regarded in the industry. If this transaction is finalized, Tesla will have a decent place to build its new sedan, if it ever gets that far.
Ultimately, I wouldn't be surprised in the least if Tesla was ultimately bought out by a large automaker that wanted access to its plug-in electric vehicle technology. I don't think that there's enough certainty about the market for plug-ins today nor do I think that its technology is far enough along for someone to be interested in buying Tesla out in the near future, but it is possible down the road (so to speak, see the automotive reference ;) ), Between now and then, the company's share price could fall quite a bit as it burns through cash and possibly needs to do another share offering to generate funds.
I sent an e-mail to the fine folks at CAPS yesterday requesting that they add TSLA to our beloved game. It now exists. I'm going to wait a little while to see what the initial pop is like, but I plan on shorting Tesla in CAPS some time today.